Credit cards can be a useful financial tool, but they can also lead to debt when consumers spend more than they can afford.
With college students returning to school and credit card companies offering incentives to sign up, financial expert Paul Hood joined News On 6 at 4 p.m. for Money Monday to explain how consumers can use credit cards responsibly.
Credit cards are not inherently good or bad
Hood said having a credit card comes down to how responsibly someone uses it.
“Credit cards are neither good nor bad. It’s just like anything else,” Hood said. “People abuse things because they don’t have self-control.”
He said consumers should consider whether they have the discipline to manage a card before applying for one.
College students can use credit cards to build credit
Hood said he supports college students having credit cards, particularly when parents are involved in setting spending limits or providing funds.
He said the key is being intentional about spending rather than using a card without a plan.
“The key to success in life is being intentional, whether it’s in your marriage, your finances, your physical fitness; do things for a reason,” Hood said.
Paying the minimum can lead to trouble
Hood said one of the biggest problems he sees is consumers making purchases without tracking how much they are spending. When the statement arrives, they may make only a minimum payment, allowing the balance to grow.
He said credit card companies can increase a customer’s credit limit, which can make it easier to accumulate more debt.
Hood said credit cards can help establish credit and improve a credit score, but consumers can quickly get in over their heads if they spend beyond their means.
Include credit card spending in your budget
Hood said consumers should account for their actual credit card purchases when creating a budget, rather than only listing the monthly payment.
If someone is not paying the entire balance each month, budgeting only for the payment can give a misleading picture of how much money is being spent.
Consumers should categorize their expenses and track where their money goes each month, including purchases charged to credit cards. That can help identify areas where spending can be reduced.
Live within your means
Hood said responsible credit card use means living within or below your means and paying off balances each month when possible.
The key, he said, is knowing how much you can afford before you swipe the card and being intentional about every purchase.